Test bank cost and management accounting 4e by barfield ch04

CHAPTER ACTIVITY-BASED COST SYSTEMS FOR MANAGEMENT MULTIPLE CHOICE An objective of activity-based management is to a b c d eliminate the majority of centralized activities in an organization reduce or eliminate non-value-added activities incurred to make a product or provide a service institute responsibility accounting systems in decentralized organizations all of the above ANSWER: Activity analysis yes no no yes ANSWER: Continuous improvement no yes yes no ANSWER: EASY c Business process reengineering no no yes yes Activity-based costing yes no yes no EASY The sum of the non-value-added time and the value-added time equals a b c d inspection time production time the product life cycle cycle time ANSWER: a Cost driver analysis yes yes no no Which of the following falls under the Activity-Based Management umbrella? a b c d EASY Which of the following is/are part of activity-based management? a b c d b d EASY Which of the following add customer value? a setup time 4–1 4–2 Chapter b c d storage time idle time processing time ANSWER: EASY idle time storage time non-value-added time value-added time ANSWER: c EASY When a firm redesigns a product to reduce the number of component parts, the firm is a b c d increasing consumer value increasing the value added to the product decreasing product variety decreasing non-value-added costs ANSWER: d Lead time minus production time is equal to a b c d Activity-Based Cost Systems for Management d MEDIUM Non-value-added activities that are necessary to businesses, but not costs that customers are willing to pay for are known as a b c d business-value-added activities long-term variable activities short-term variable activities superior business activities ANSWER: a MEDIUM Chapter Activity-Based Cost Systems for Management Which of the following would not be considered a value-added activity in the preparation of a tax return? a b c d printing a copy of the return for the client printing a copy of the return for the IRS installing tax software checking for accuracy ANSWER: 10 Idle time yes no yes no ANSWER: EASY b Inspection time yes no no yes Transfer time no no yes yes EASY A process map a b c d should indicate only value-added activities is also known as a detailed flowchart should indicate only those steps/processes that are obvious in the production of goods/services is also known as a value chart ANSWER: 12 c Which of the following is considered a value-added activity? a b c d 11 4–3 b EASY A value chart should include which of the following? a b c d Service time yes no yes yes ANSWER: d Inspection time no no yes yes EASY Transfer time yes yes no yes 4–4 13 Chapter The actual time it takes to perform a specific task is called a b c d inspection time service time transfer time quality time ANSWER: 14 EASY bottlenecks effectiveness efficiency quality ANSWER: c EASY Which of the following is typically regarded as a cost driver in traditional accounting practices? a b c d number of purchase orders processed number of customers served number of transactions processed number of direct labor hours worked ANSWER: 16 b Manufacturing cycle efficiency is a measure of a b c d 15 Activity-Based Cost Systems for Management d EASY When a company is labor-intensive, the cost driver that is probably least significant would be a b c d direct labor hours direct labor dollars machine hours cost of materials used ANSWER: c EASY Chapter 17 Activity-Based Cost Systems for Management An activity driver is used for which of the following reasons? a b c d To measure demands yes yes no no ANSWER: 18 EASY any activity that can be used to predict cost changes the attempt to control expenditures at a reasonable level the person who gathers and transfers cost data to the management accountant any activity that causes costs to be incurred ANSWER: d MEDIUM Cost allocation bases in activity-based costing should be a b c d cost drivers value-added activities activity centers processes ANSWER: 20 a To measure resources consumed yes no yes no The term cost driver refers to a b c d 19 4–5 a EASY Costs that are common to many different activities within an organization are known as costs a b c d product- or process-level organizational-level batch-level unit-level ANSWER: b EASY 4–6 21 Chapter In activity-based costing, cost reduction efforts are directed at specific a b c d cost categories cost pools processes cost drivers ANSWER: 22 EASY A batch cost no yes yes no ANSWER: c A value-added cost no yes no yes A production cost yes no yes yes EASY Which of the following have an impact on long-term variable costs? a b c d Product variety no no yes yes ANSWER: 24 d Setup time is a b c d 23 Activity-Based Cost Systems for Management d Product complexity no yes no yes Process complexity no yes yes yes MEDIUM In allocating variable costs to products, a b c d a volume-based cost driver should be used direct labor hours should always be used as the allocation base a company should use the same allocation base that it uses for fixed costs a company should never use more than one cost driver ANSWER: a EASY Chapter 25 Activity-Based Cost Systems for Management In which of the following areas does attribute-based costing (ABCII) employ detailed cost-benefit analyses relating to information on customer needs? a b c d Reliability no yes yes no ANSWER: 26 MEDIUM The choices are too numerous The potential for errors is great Only a small percentage of available choices is normally selected All of the above are drawbacks ANSWER: d MEDIUM Simultaneous engineering helps companies accomplish which of the following? a b c d Reduces product complexity no yes yes no ANSWER: 28 c Durability no no yes yes Which of the following is not a drawback of mass customization? a b c d 27 4–7 b Reduces process complexity no yes no yes EASY For traditional costing purposes, R&D costs are a b c d capitalized and allocated over the product life cycle expensed as incurred capitalized and amortized over three years charged to the future accounting periods that receive the benefit of the R&D expenditures ANSWER: b EASY 4–8 29 Chapter An accounting system that focuses on transactions is a b c d an activity-based accounting system a product life cycle costing system a traditional accounting system all of the above ANSWER: 30 EASY activities processes departments costs ANSWER: d EASY Today, traditional accounting methods are a b c d still appropriate for financial reporting still appropriate for providing useful cost information to internal managers still appropriate for both internal and external financial reporting outdated for all purposes ANSWER: 32 c Traditionally, managers have focused cost reduction efforts on a b c d 31 Activity-Based Cost Systems for Management a EASY Product costing systems in use over the last 40 years a b c d concentrated on using multiple cost pools and cost drivers were often technologically incapable of handling activity-based costing information have generally been responsive to changes in the manufacturing environment have been appropriate for managerial decision purposes as long as they met the requirements of generally accepted accounting principles ANSWER: b MEDIUM Chapter 33 Activity-Based Cost Systems for Management Traditional overhead allocations result in which of the following situations? a b c d Overhead costs are assigned as period costs to manufacturing operations High-volume products are assigned too much overhead, and low-volume products are assigned too little overhead Low-volume products are assigned too much, and high-volume products are assigned too little overhead The resulting allocations cannot be used for financial reports ANSWER: 34 EASY over-costs the product under-costs the product has no effect the product cost cost per unit is unaffected by product volume ANSWER: a EASY Relative to traditional product costing, activity-based costing differs in the way costs a b c d processed allocated benchmarked incurred ANSWER: 36 b Traditionally, overhead has been assigned based on direct labor hours or machine hours What effect does this have on the cost of a high-volume item? a b c d 35 are 4–9 b EASY Under activity-based costing, benchmarks for product cost should contain an allowance for a b c d idle time idle time and scrap materials spoilage none of the above ANSWER: d MEDIUM 4–10 37 Chapter In activity-based costing, final cost allocations assign costs to a b c d departments processes products activities ANSWER: 38 EASY direct labor hours should always be used as the allocation base a company should use the same allocation base that it uses for variable costs a cost driver that is not volume-related should be used machine hours should always be used ANSWER: c MEDIUM Of the following, which is the best reason for using activity-based costing? a b c d to keep better track of overhead costs to more accurately assign overhead costs to cost pools so that these costs are better controlled to better assign overhead costs to products to assign indirect service overhead costs to direct overhead cost pools ANSWER: c EASY ABC should be used in which of the following situations? a b c d 42 d In allocating fixed costs to products in activity-based costing, a b c d 41 EASY departments processes products activities ANSWER: 40 c In activity-based costing, preliminary cost allocations assign costs to a b c d 39 Activity-Based Cost Systems for Management single-product firms with multiple steps multiple-product firms with only a single process multiple-product firms with multiple processing steps in all manufacturing firms ANSWER: c EASY The overhead of American manufacturing firms has risen in recent years due to a an increase in direct labor 4–12 Chapter d are ideal goals ANSWER: 48 MEDIUM the product life cycle lead time production time value-added time ANSWER: b EASY For one product that a firm produces, the manufacturing cycle efficiency is 20 percent If the total production time is 12 hours, what is the total manufacturing time? a b c d 15.0 hours 60.0 hours 12.0 hours 2.4 hours ANSWER: 50 a The amount of time between the development and the production of a product is a b c d 49 Activity-Based Cost Systems for Management b EASY Activity analysis allows managers to a b c d classify activities so that processes can be eliminated devise ways to minimize or eliminate non-value-added activities evaluate process performance to gain competitive advantages all of the above ANSWER: b EASY Chapter 51 Activity-Based Cost Systems for Management Which of the following statements about business-value-added activities (BVAs) is true? a b c d BVAs reflect the same processes in all organizations A process map will not reflect BVAs because such activities are not essential to process performance BVAs are actually value-added activities of an organization that relate to administrative processes It is impossible to eliminate all BVAs in an organization ANSWER: 52 MEDIUM all steps in a process and the time it takes for them to be completed the value-added steps in a process and the time it takes for them to be completed the time and cost of all value-added steps in a process the time and costs of all value-added and non-value-added steps in a process ANSWER: a MEDIUM In the pharmaceutical or food industries, quality control inspections would most likely be viewed as a b c d non-value-added activities business-value-added activities value-added-activities process-efficiency activities ANSWER: 54 d A value chart indicates a b c d 53 4–13 c DIFFICULT A just-in-time manufacturing process should have substantially less of which of the following than a traditional manufacturing process? a b c d Idle time yes yes yes no ANSWER: c Transfer time yes no yes yes DIFFICULT Value-added time yes no no yes Cycle time yes yes yes no 4–14 55 Chapter Manufacturing cycle efficiency should be increased by employing which of the following techniques? a b c d JIT Flexible Batch Inventory yes yes no yes Manufacturing Systems yes yes no no Manufacturing yes no no yes ANSWER: 56 MEDIUM all cost drivers identified should be used for cost accumulation the cost of measuring a driver does not exceed the benefits of using it only costs occurring at the unit-level should be assigned to products or services organizational/facility costs are non-value-added and should never be assigned to products or services ANSWER: b MEDIUM When cost driver analysis is used, organizational profit or loss can be determined by subtracting a b c d organizational costs from total margin provided by products organizational costs from total product revenue total product costs from total product revenue total unit, batch, product/process, and organizational level costs incurred for a period from total product revenue ANSWER: 58 b A key concept underlying cost driver analysis is that a b c d 57 Activity-Based Cost Systems for Management a MEDIUM An activity center is an organizational unit a b c d that makes a single product or performs a single service in which only value-added activities are performed that incurs only unit, batch, or product/process level costs for which management wants separate activity information ANSWER: d EASY Chapter 59 Activity-Based Cost Systems for Management The following items are used in tracing costs in an ABC system In which order are they used? (1) (2) (3) (4) cost object cost driver activity driver cost pool a b c d 1, 2, 3, 2, 3, 4, 2, 4, 3, 4, 3, 1, ANSWER: 60 DIFFICULT variable fixed unit-based short-term ANSWER: a EASY Tessia Company makes ten different styles of inexpensive feather masks Which of the following is this company most likely to have? a b c d Product complexity Process complexity Product variety Process customization ANSWER: 62 c The “Rule of One” underlies the premise that all costs are a b c d 61 4–15 c EASY Attribute-based costing (ABC II) employs which of the following in its cost-benefit analyses? a b c d Past costs Long-term variable costs Reengineered costs Planned costs ANSWER: d MEDIUM 4–16 63 Chapter Mass customization can be achieved through the use of a b c d activity-based costing just-in-time inventory flexible manufacturing systems all of the above ANSWER: 64 Product variety yes yes no yes ANSWER: EASY d Product complexity no yes yes no Process errors no yes no yes Pareto principle yes no no yes DIFFICULT The Pareto principle is important to consider when an organization is a b c d assessing whether to employ activity-based costing versus attribute-based costing evaluating the number of activities that are value-added versus those that are non-value-added deciding whether to offer a product in one color versus in ten colors determining whether simultaneous engineering activities will be impacted by the “Rule of One.” ANSWER: 66 c Mass customization is closely associated with a b c d 65 Activity-Based Cost Systems for Management c MEDIUM Simultaneous engineering can be used to a b c d reduce both product and process complexity integrate activity-based costing with value chain analysis reduce the time-to-market of new products through elimination of batch-level activities reduce manufacturing cycle efficiency by reducing process waste ANSWER: a EASY Chapter 67 Activity-Based Cost Systems for Management If only one or two overhead cost pools are used, a b c d it will be easy to determine which products or services are creating the most costs overhead created by a specific product will be assigned to all products the reduction in cost accumulation and allocation time will raise company profits allocations should be made using only unit-based cost drivers ANSWER: 68 EASY automated one or more production processes introduced new products to its customers had its industry deregulated all of the above ANSWER: d EASY Engaging in which of the following will result in radical changes being made to an organization’s processes? a b c d Continuous improvement Benchmarking Reengineering Mass customization ANSWER: 70 b A cost accumulation system should most likely be reevaluated when a company has a b c d 69 4–17 c MEDIUM Use of activity-based costing and activity-based management requires a b c d the creation of an environment for change in an organization elimination of all non-value-added activities in an organization that company processes be automated and the use of direct labor be minimal each process be fully mapped and all activities be identified as value-added or non-value-added ANSWER: a EASY 4–18 71 Chapter Which of the following is most likely to make the implementation of ABC/ABM slow and difficult? a b c d The inability of all employees to understand the computations involved in ABC A lack of involvement by or support from upper management The need for dual costing systems An inability to eliminate all business-value-added activities ANSWER: 72 b MEDIUM Activity-based costing and generally accepted accounting principles differ in that ABC a b c d does not define product costs in the same manner as GAAP cannot be used to compute an income statement, but GAAP can is concerned only with costs generated from automated processes, but GAAP is concerned with costs generated from both manual and automated processes information is useful only to managers, while GAAP information is useful to all organizational stakeholders ANSWER: 73 Activity-Based Cost Systems for Management a EASY If activity-based costing is implemented in an organization without any other changes being effected, total overhead costs will a b c d be reduced because of the elimination of non-value-added activities be reduced because organizational costs will not be assigned to products or services be increased because of the need for additional people to gather information on cost drivers and cost pools remain constant and simply be spread over products differently ANSWER: d DIFFICULT Chapter 74 Activity-Based Cost Systems for Management Kan Co produces two products (A and B) Direct material and labor costs for Product A total $35 (which reflects direct labor hours); direct material and labor costs for Product B total $22 (which reflects 1.5 direct labor hours) Three overhead functions are needed for each product Product A uses hours of Function at $10 per hour, hour of Function at $7 per hour, and hours of Function at $18 per hour Product B uses 1, 8, and hours of Functions 1, 2, and 3, respectively Kan produces 800 units of A and 8,000 units of B each period If total overhead is assigned to A and B on the basis of units produced, Product A will have an overhead cost per unit of a b c d $ 88.64 $123.64 $135.00 none of the above ANSWER: 75 MEDIUM $84.00 $88.64 $110.64 none of the above ANSWER: b MEDIUM Use the information from #74 If total overhead is assigned to A and B on the basis of direct labor hours, Product A will have an overhead cost per unit of a b c d $51.32 $205.28 $461.88 none of the above ANSWER: 77 a Use the information from #74 If total overhead is assigned to A and B on the basis of units produced, Product B will have an overhead cost per unit of a b c d 76 4–19 b MEDIUM Use the information from #74 If total overhead is assigned to A and B on the basis of direct labor hours, Product B will have an overhead cost per unit of a b c d $51.32 $76.98 $510.32 none of the above ANSWER: b MEDIUM 4–20 78 Chapter Use the information from #74 If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product A will be a b c d $86.32 $95.00 $115.50 none of the above ANSWER: 79 c MEDIUM Use the information from #74 If total overhead is assigned to A and B on the basis of overhead activity hours used, the total product cost per unit assigned to Product B will be a b c d $115.50 $73.32 $34.60 none of the above ANSWER: 80 Activity-Based Cost Systems for Management a MEDIUM JJ Corp produces 50,000 units of Product Q and 6,000 units of Product Z during a period In that period, four set-ups were required for color changes All units of Product Q are black, which is the color in the process at the beginning of the period A set-up was made for 1,000 blue units of Product Z; a set-up was made for 4,500 red units of Product Z; a set-up was made for 500 green units of Product Z A set-up was then made to return the process to its standard black coloration and the units of Product Q were run Each set-up costs $500 If set-up cost is assigned on a volume basis for the department, what is the approximate per-unit set-up cost for Product Z? a b c d $.010 $.036 $.040 none of the above ANSWER: b MEDIUM Chapter 81 Activity-Based Cost Systems for Management JJ Corp produces 50,000 units of Product Q and 6,000 units of Product Z during a period In that period, four set-ups were required for color changes All units of Product Q are black, which is the color in the process at the beginning of the period A set-up was made for 1,000 blue units of Product Z; a set-up was made for 4,500 red units of Product Z; a set-up was made for 500 green units of Product Z A set-up was then made to return the process to its standard black coloration and the units of Product Q were run Each set-up costs $500 If set-up cost is assigned on a volume for the department, what is the approximate per-unit set-up cost for the red units of Product Z? a b c d $.036 $.111 $.250 none of the above ANSWER: 82 b MEDIUM Use the information from #80 Assume that JJ Corp has decided to allocate overhead costs using levels of cost drivers What would be the approximate per-unit set-up cost for the blue units of Product Z? a b c d $.04 $.25 $.50 none of the above ANSWER: 83 4–21 c MEDIUM Use the information from #80 Assume that JJ Corp has decided to allocate overhead costs using levels of cost drivers What would be the approximate per-unit set-up cost for the green units of Product Z? a b c d $1.00 $0.25 $0.04 none of the above ANSWER: a MEDIUM 4–22 Chapter Activity-Based Cost Systems for Management SHORT ANSWER/PROBLEMS Why are external performance measures preferred to internal performance measures in American businesses today? ANSWER: External performance measures are appropriate because businesses are now oriented to external goals For example, many firms are very concerned with providing high-quality products and outstanding customer service If these are appropriate goals, consumer-based (external) measures must be employed to determine if the goals are being achieved MEDIUM In activity-based costing, how are cost drivers selected? ANSWER: Cost drivers are selected based on their underlying relationship to organizational costs Ideally, a causal relationship exists between the cost driver and a cost pool Once identified, cost drivers are used to allocate organizational costs to activities and products and are the focus of cost control efforts MEDIUM Discuss the characteristics of a company for which ABC would be useful ANSWER: Companies having the following characteristics find ABC useful: (1) hard-to-make products that show large profits and easy-to-make products that show losses; (2) profit margins that are difficult to explain; (3) considerable automation that makes it difficult to assign overhead to products that use machine hours or direct labor as bases; (4) substantial overhead costs that are not in proportion to the number of products; and (5) a wide variety of services or products MEDIUM ABC has been criticized for a variety of reasons Discuss these criticisms ANSWER: One criticism is that ABC does not promote total quality management and continuous improvement Another criticism of ABC is that ABC does not adhere to generally accepted accounting principles An ABC system might allocate nonproduct costs (research and development) to products, while not allocating some traditional product costs (factory depreciation on machines) to products A third criticism of ABC relates to the cost of implementation An ABC system takes considerable time to implement, and therefore, it is very costly MEDIUM Chapter Activity-Based Cost Systems for Management 4–23 How has the increase in product variety affected the costs of American business? ANSWER: The increase in product variety has increased the overhead costs of American firms These costs include significant setup costs to switch from the production of one product to another, costs of additional technology, inventory carrying costs, purchasing costs, and scheduling costs MEDIUM Discuss the four different levels of costs that are now being identified How should these types of costs be treated under ABC? ANSWER: The four different levels are unit-level costs, batch-level costs, product- or process-level costs, and organizational or facility costs Unit-level costs include direct material, direct labor, and some traceable machine costs These are incurred once for each item produced and are considered part of total product cost Batch-level costs include machine setup, material handling, and purchasing or ordering costs These are incurred once for each batch of items produced and are allocated over the total number of units in the batch These are also considered part of total product cost Product- or process-level costs include engineering changes, design, and development costs These are allocated to the total number of units produced in the product line and are considered part of total product cost Organizational or facility costs include building depreciation, administrative salaries, and organizational advertising These costs are not product-related and should be deducted from net product revenue MEDIUM 4–24 Chapter Activity-Based Cost Systems for Management Box Co manufactures hand-made pine storage boxes for a variety of clients As production manager, you have developed the following value chart: Operation Receiving materials Storing materials Handling materials Cutting/measuring materials Assembling materials Building boxes Attaching hinges Inspection a b c Average Number of Days Determine the value-added activities and their total time Determine the non-value-added activities and their total time Calculate the manufacturing cycle efficiency ANSWER: a Value-added activities Cutting/measuring materials Assembling materials Building boxes Attaching hinges Total production time (days) Time 19 b Non-value-added activities Receiving Storing Handling Inspection Total nonproduction time (days) Time c Total lead time = 19 + = 26 days MCE = 19/26 = 73.1% EASY Chapter Activity-Based Cost Systems for Management 4–25 TriCo would like to institute an activity-based costing system to price products The company’s Purchasing Department incurs costs of $550,000 per year and has six employees Purchasing has determined the three major activities that occur during the year Activity Issuing purchase orders Reviewing receiving reports Making phone calls Allocation Measure # of purchase orders # of receiving reports # of phone calls # of People Total Cost $150,000 $175,000 $225,000 During the year 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and 10,000 shipments were received Product A required 200 phone calls, 150 receiving reports, and 50 purchase orders Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders a b Determine the amount of purchasing department cost that should be assigned to each of these products Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of Product B were manufactured during the year ANSWER: a $150,000/15,000 = $10 per purchase order $175,000/10,000 = $17.50 per receiving report $225,000/50,000 = $4.50 per phone call 50 purchase orders ×$10 100 purchase orders × $10 150 receiving reports × $17.50 400 receiving reports × $17.50 200 phone calls × $4.50 350 phone calls × $4.50 Total cost b Product A $ 500 $1,000 2,625 7,000 900 $4,025 Product A= $4,025/1,500 = $2.68 per unit Product B= $9,575/3,000 = $3.19 per unit MEDIUM Product B 1,575 $9,575 ... unit-level costs, batch-level costs, product- or process-level costs, and organizational or facility costs Unit-level costs include direct material, direct labor, and some traceable machine costs... over-costs the product under-costs the product has no effect the product cost cost per unit is unaffected by product volume ANSWER: a EASY Relative to traditional product costing, activity-based costing... Activity-Based Cost Systems for Management Kan Co produces two products (A and B) Direct material and labor costs for Product A total $35 (which reflects direct labor hours); direct material and labor costs